Imagine you hold a portfolio of three stocks: Coca Cola Company [KO], a manufacturer and distributor of

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Imagine you hold a portfolio of three stocks: Coca Cola Company [KO], a manufacturer and distributor of soft drinks; Dell Inc. [DELL], a manufacturer of personal and enterprise computers; and Fifth Third Bank [FITB], a large bank that offers commercial banking, retail banking, and investment advisory services. Each of these companies is preparing to launch a new project. Coca Cola is launching a new version of Coca Cola with increased caffeine. Dell has produced a new, very low cost personal computer to deliver the basic functions of e-mail, web browsing, and word processing for individuals who do not need all the ‘‘bells and whistles.’’ Fifth Third Bank has shifted its investment in marketable securities so as to earn higher returns; this shift has increased the riskiness associated with the bank’s investment portfolio.
The
following betas were estimated by the companies for the new projects:

Company....................................................... Project Beta
Coca Cola................................................................ 1.19
Dell........................................................................... 2.01
Fifth Third Bank...................................................... 1.20

Using the Thomson ONE database, answer these questions:
a. What is the current beta of the three firms? (Click on Price/Interactive Charts.)
b. If the new project causes the corporate beta to rise, how will this impact the company’s risk and the shareholders’ required rate of return?
c. Can you use the pure play method to determine a more accurate project beta for any or all of these firms? Why or why not?

Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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Related Book For  book-img-for-question

Essentials of Managerial Finance

ISBN: 978-0324422702

14th edition

Authors: Scott Besley, Eugene F. Brigham

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